Inflation starts to ease as supermarkets slash prices

By IBT Staff Reporter On 11/15/11 AT 8:32 AM

Inflation eased last month for the first time since June as supermarkets slashed prices to lure cash-strapped Britons, lending support to the Bank of England's expectation that inflation will hit its 2 percent target by the end of next year.

Bank governor Mervyn King reiterated his view that inflation will fall sharply over the next six months as one-offs such as an increase in VAT fall out of the equation and a gloomier economic outlook limits companies' ability to raise prices.

Consumer price inflation eased to 5 percent from September's three-year high of 5.2 percent as food prices dropped sharply on the month, the Office for National Statistics said on Tuesday. The inflation rate had shot up from 4.2 percent between June and September.

Economists, who had expected an October reading of 5.1 percent, said lower inflation raised the chances of more quantitative easing by the central bank in the coming months.

The Bank announced last month it would inject an additional 75 billion pounds to bolster an economy struggling to grow as the government is slashing public spending and its main trading partner, the euro zone, is in turmoil.

Governor King is widely expected to give a gloomy view of the economy when he presents the Bank's quarterly Inflation Report on Wednesday.

(Inflation data) should help to reinforce the Bank of England's conviction that inflation has peaked. I think that is correct, said Brian Hilliard of Societe Generale.

However, I think the emphasis tomorrow in the Inflation Report will be on the deepening gloom from the damage the euro zone crisis is doing to our economy and growth prospects.

Several Bank policymakers have warned of the possibility of another recession in Britain.

BoE TARGET

Inflation will fall sharply over the next six months to hit its 2 percent target by the end of 2012, King said in a letter to Chancellor George Osborne, which he was obliged to write, explaining why inflation was so firmly above target.

King noted that the economic outlook had deteriorated since August, adding that inflation could fall back more quickly than previously expected.

Osborne, in his response letter, backed the Bank's decisions, saying the uncertain global economic outlook was the main risk for Britain. The threat to the UK economy from the crisis in the euro zone is very serious, he said.

The slowdown in inflation, which eased to 0.1 percent on the month, was driven by lower food, air transport and petrol costs. On the month, food prices fell by 0.9 percent -- their sharpest drop for the month of October since 1996.

Tesco, Britain's biggest retailer, launched a discount campaign in October to reverse a gradual drift lower in its market share, triggering responses from top rivals Walmart-owned Asda, J Sainsbury and Wm Morrison.

Upward pressures on inflation came from utility charges, which rose at their fastest annual rate since February 2009, as well as from rising clothing prices.

The retail price inflation gauge, which includes more housing costs and is the benchmark for many wage deals, slowed to 5.4 percent on the year from 5.6 percent in September, versus a forecast reading of 5.5 percent.

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